How is a Hotel/Motel Selling Price Established?.
As a seller, one would like to sell for the highest marketable sales price. This leads us to the question of: What is the highest marketable sales price? The key word here is marketable.

First you must realize that when you sell a hotel or motel you are selling a business and that means its value lies in its ability to generate profits. There are other determinants of value but they are usually of less interest to an informed buyer. Although it is prudent to list a property slightly above its market value to allow room for negotiation, one must take caution to not overprice the property. An unrealistically high price can damage the marketability of a property. Buyers will not make offers and the property will remain on the market leaving the impression that something is wrong with it and it will become"dog eared"

or "over-shopped". Even if we suppose a buyer will pay an inflated price for the property, the transaction must be supported by an appraisal and pass the valuation tests of a financing institution. If the deal falls through as a result, then we have all wasted much time and effort and we have not achieved our goal, that is, to sell the property.

The above leads us to the single most important element of value. That is, a sustained net income. The net income being the income remaining after subtracting all operating expenses excluding the expenses for debt service, income taxes, depreciation and any expenses that would not apply to a new buyer. The net income must satisfy two very important demands. Number one, it must cover the monthly payments required by the buyer's financing. Number two, it must provide an acceptable return to the buyer. The first demand is relatively easy to establish. Using the estimated sales price subtract

the cash down payment to yield the amount to finance. Using the current lending rates and terms available in the market place calculate the monthly payment. The second demand is more difficult since different buyers will have different acceptable return requirements. Market information regarding lodging industry sales suggest that buyers look for cash returns ranging from 15% to 20% of their total equity invested. Owner operators generally will require the higher cash returns. We can now say that if the net income will not support the two demands stated above then the property is overpriced for the current market.

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